Page 35 - EBA 2013.2869 Risk Assesment Report final proof4

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R I S K A S S E S S M E N T O F T H E E U R O P E A N B A N K I N G S Y S T E M
33
0 % 20 % 40 % 60 % 80 %
Your bank can operate on a longer-term
basis with a return on equity (RoE):
a. Below 10 %
b. Between 10 % and 12 %
c. Between 12 % and 14 %
d. Between 14 % and 16 %
c. Above 16 %
0 % 20 % 40 % 60 % 80 %
In your financial planning you estimate
your bank’s cost of equity (CoE).
a. If yes, you estimate it at:
ˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆi. Below 8 %
ˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆii. Between 8 % and 10 %
ˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆ iii. Between 10 % and 12 %
ˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆˆ iv. Above 12 %
Jun 2013 — Agree
or somewhat agree
Figure 26: Return on equity and cost of equity (
source:
RAQ)
The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.
0 %
20 %
40 %
60 %
80 %
100 %
120 %
140 %
160 %
180 %
Dec 09
Mar 10
Jun 10
Sep 10
Dec 10
Mar 11
Jun 11
Sep 11
Dec 11
Mar 12
Jun 12
Sep 12
Dec 12
Figure 27: Cost-to-income ratio (
source:
KRI) —
5th and 95th percentiles, interquartile range and median
The majority of the RAQ respondents consid-
er an RoE value in the range of 10 % to 12 % as
the target for the long-term viability of their
businesses. For the RAQ respondents, the
main factors that will influence the RoE in the
next months are both the operating margins
and the pre-tax profit margins. In addition,
a vast majority agree or somewhat agree
that the current earnings levels are within
market expectations. In contrast, some RAQ
responses from market analysts (RAQ for
market analysts) refer that the current earn-
ings levels are moderately below market
expectations. In regard to the cost of equity
(CoE), most respondents believe it to be also
in the 10 % to 12 % range. Given the fact that
banks need to provide a return to investors
at or above their cost of equity, in a context
of economic downturn and sector deleverag-
ing there are limited and less flexible levers
available to meet minimum returns, turning
some business models unviable.
According to many respondents, the CoE has
subsided significantly since August 2012, and
this is widely attributed to the European Cen-
tral Bank’s outright monetary transactions
(OMT) announcement. The rise in banks’
share prices over this period is attributed to
the falling CoE, as it has happened despite a
drop in the banks’ earnings.
At the same time, the KRIs show that the
cost-to-income ratio in December 2012 in-
creased. For instance, the weighted cost-to-
income ratio has significantly increased from
59.7 % in June 2012 to 63.2 % in December
2012. The median and the 75th percentile
have also eroded since March 2011 (from
56.3 % and 63.2 % to 63.1 % and 71.6 % in De-
cember 2012, respectively).